In my Podcast last week on “Post Election Rally in Markets”, I had said that just like Brexit, a Trump victory could lead to markets rallying against popular perception. S&P 500 closed over 1% after initially dropping by almost 5% in the futures markets post election. Markets in fact welcomed Trump as it welcomed Brexit.
This year 2016 has seen many unexpected things happening. Trump victory, Brexit, India demonetising Rs 500 and Rs 1000 notes, RBI Governor not taking a second term, negative bond yields etc. Markets feared the worst before and during the event but then calmed down once the event was over. The unexpected happened but did not cause chaos as expected.
The New Norm for Markets and Investments is “The Unexpected will Happen” and positioning for the unexpected will give the best rewards. The question is how do you position for the unexpected?
General investment theory suggests that all prices reflect future expected outcomes. Given this, it is impossible to make higher returns than what the market can offer. Hence the only way to beat the market is to position for the unexpected.
The unexpected can be anything from a natural cause to business disruptions to political upheavals and terrorist acts. The fact that these are unexpected, one cannot really bet on the outcomes. However once the unexpected is taking place, there is enough time for you to build your investments based on the expected outcome of the unexpected.
A simple example is capturing the post Brexit rally or a post Trump equity rally. The unexpected has happened, markets did not behave as expected and this provides a strong platform for a strong equity market rally.
The banning of Rs 500 and Rs 1000 notes, while completely unexpected, provides a great opportunity to buy into bond yields. Read our note on “Why demonetisation will lead to bond yields falling”.
In terms of business disruptions, always look for young firms with new ideas to upset the traditional leaders. Look for turning points in economic and market cycles. All these will come upon you unexpectedly but if you are already expecting the unexpected, you will be well prepared to reap the gains.
Join our growing list of subscribers who have benefitted from our sound advice and from our focus on knowledge. Why delay, get your savings growing. Join our Online Advisory Service. Please call Neelima at +919819770641 or log in to investorsareidiots.com or download investorsareidiots App for Android or IOS to subscribe. Thank you for listening in.
